The OPEC (Organization of the Petroleum Exporting Countries), founded in 1960 accounted to regulate the oil production, and therefore controlling its price, has seen its power weaken over the last years. In order to cope with the growing US production of shale oil, OPEC members, Russia and nine other exporting countries joined forces to form the OPEC+.
On Friday, December 6th 2019, OPEC+ members agreed to cut production by at least 500 000 barrels per day (0.50% of the worldwide daily oil production). Responsible for around 50% of the world oil production, these countries aim to keep oil prices around the current level of $65 per barrel for the year 2020. Following this announcement, the price of a barrel of Brent appreciated by 1.60% while the barrel of WTI appreciated by 1.20%
The OPEC, a weakened organization.
As the world’s largest oil exporter, Saudi Arabia is one of the few OPEC+ Countries to produce far below its production levels, and stresses that the agreement must be honored by all countries belonging to the organization. More specifically referring to countries such as Russia, Nigeria and Iraq, which do not respect those agreed production targets. Abdulaziz bin Salman, new head of Ministry of Energy in Saudi Arabia, has reaffirmed his intention to enforce the defined quotas.
While OPEC+ members attempts to reduce oil production, other countries keep increasing their own production such as Canada, Brazil, Norway, and the United States that became the world’s largest producer of shale oil in 2018.
OPEC+ members alone are unlikely to be able to regulate the price of a barrel for the next few years. In order to cope with growing production of the new players, one solution of the OPEC would be to build new alliances with the goal of expanding the number of its members. October 30th 2019, Jair Bolsonaro said he would be keen that Brazil could become a member of the OPEC.
Trends for 2020 and beyond.
Global oil demand is expected to increase in the next five years. According to OPEC’s statistics, OECD countries (Organization for Economic Cooperation and Development) should reduce their oil consumption by 0.50% between 2018 and 2024. Non-OECD countries are expected to increase their demand for oil by 6.60% over the same period of time.
However, the demand growth rate should be decreasing over the next five years and fall below 1% threshold in 2021 and reach 0.82% in 2024. The constant growing interest for renewable energies, especially in the transport sector, should help to decrease the demand in the long run.
The oil production should have no trouble keeping up with the demand for the next five years. According to the OPEC, oil production in non-OPEC countries is expected to increase by 9.90% between 2018 and 2024. In 2024, the world production will reach 105 million barrels per day. OPEC members’ shares in the world production is expected to decline over the next five years.
In the short term, the production in OPEC+ countries is expected to decrease in 2020 further the decision taken on December 5th and 6th 2019. Though, a reduction in the quota of 500 000 barrel per day does not mean a reduction in production by the same amount. Indeed, some countries, such as Saudi Arabia and Angola, already produce less than their quota. The reduction in the quota should therefore translate into a reduction in effective production of around 100 000 barrels per day. This decision to reduce quotas will above all remind Russia, Iraq and Nigeria that they are not meeting the production levels to which they have committed themselves.
OPEC’s awaiting challenges
In the next 5 years, the main challenges the OPEC is awaiting are:
- OPEC members Failing to honor commitments regarding the oil production quotas.
- The drop in Oil consumption in OECD countries.
- The expanding production of non-OPEC countries (United-States, Canada, Norway and Brazil).
- Internal tensions and the integration of new members in the organization.
Cross-Asset Structurer at Marigny Capital